{"id":27748,"date":"2015-01-16T06:22:28","date_gmt":"2015-01-16T06:22:28","guid":{"rendered":"http:\/\/ci027cfe65a01026c3"},"modified":"2015-01-16T06:22:28","modified_gmt":"2015-01-16T06:22:28","slug":"bitcoin-value-1421367748","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/culture\/bitcoin-value-1421367748","title":{"rendered":"Why Bitcoin Has Value"},"content":{"rendered":"
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We all have what feels like an intrinsic understanding of value, though it is actually learned as we come to know our world. A gold bar has value, an empty soda can, not so much. When we encounter new things it\u2019s usually fairly easy to assess what kind of value they might hold, but Bitcoin is a different beast. Bitcoin is harder to define and understand, and for many beginning Bitcoiners the question of value is one of the most puzzling. So why does Bitcoin have value?<\/p>\n

To begin, we really need to understand why anything has value. Fans of post-apocalyptic fiction will often point out that in the end, the only things of real value are those that sustain and defend life. Perhaps they\u2019re right on one level, but with the rise of civilized societies things got a bit more complex, because the things that sustain and defend those societies also gain a certain degree of value. It is in this context that all moneys, Bitcoin included, gain their value. Since our societies rely heavily on trade and commerce, anything that facilitates the exchange of goods and services has some degree of value.<\/p>\n

From Barter to Money<\/strong><\/p>\n

Imagine, for example, a pre-money marketplace where the barter system is king. Perhaps you\u2019re a fisherman coming to mar- ket with the day\u2019s catch and you\u2019re looking to go home with some eggs. Unfortunately for you, the chicken farmer has no use for fish at the moment, so you need to arrange a complex series of exchanges to end up with something the egg seller actually wants. You\u2019ll probably lose a percentage of your fish\u2019s value with each trade, and you also must know the exchange rate of everything with respect to everything else. What a mess.<\/p>\n

This is where money saves the day. By agreeing on one interme- diate commodity, say, silver coins, two is the maximum number of exchanges anyone has to make. And there\u2019s only one exchange rate for every other commodity that matters: its cost in silver coins.<\/p>\n

In truth there is more complexity involved\u2014some things, like your fish, would make very poor money indeed. Fish don\u2019t stay good for very long, they\u2019re not particularly divisible, and depending on the exchange rate, you might have to carry a truly absurd amount of them to make your day\u2019s purchases.<\/p>\n

On the other hand, silver coins have their inherent problems too, when traded on extremely large or extremely small scales. This is what is truly valuable about Bitcoin: It\u2019s better money.<\/p>\n

The Evolution to Bitcoin<\/strong><\/p>\n

It\u2019s been a long time since those first \u201chard\u201d moneys were developed, and today we transact primarily with digital representations of paper currency. We imagine bank vaults filled with stacks of cash, but that\u2019s almost never the case these days\u2014 most money exists merely as numbers in a database. There\u2019s nothing wrong with this type of system, either; it works fantastically well in an age where physical presence during a transaction is not a given. The problem is that the system is aging and far too often plagued by incompetence or greed.<\/p>\n

Every IT guy knows that from time to time you have to take a drastic step: throw the old system in the trash and build a new one from scratch. Old systems, such as our current monetary system, have been patched so many times they are no longer functioning as efficiently as they should.<\/p>\n

We previously patched our problems with gold and silver by introducing paper banknotes. We patched further problems by removing the precious metal backing those banknotes, then patched them again and again to allow wire transfers, credit cards, debit cards, direct deposit and online billpay. All the cornerstones of modern life are just patches on this ancient system.<\/p>\n

But what would you do if you had the chance to start over? What if you could make purely digital money based on modern technologies to solve modern needs? What if we didn\u2019t need those dusty old systems or the people making absurd profits maintaining them? This is Bitcoin.<\/p>\n

Replacement, Not Repair<\/strong><\/p>\n

Bitcoin isn\u2019t another patch, another layer of abstraction added on top of an aging and over-complex system. Bitcoin isn\u2019t another bank or payment processor coming up with new ways to move old dollars. Bitcoin is instead a simple, elegant and modern replacement for the entire concept of money. It has value for exactly the same reason as the paper money in your wallet: It simplifies the exchange of goods and services, not in the antique setting of a barter system bazaar, but in the current setting of modern Internet-enabled life.<\/p>\n

\u201cBut that\u2019s only why it\u2019s useful,\u201d I hear some of you saying. \u201cWhy does it actually have value?\u201d The two-word answer is one most economists are familiar with: Network effect. The network effect is a lovely piece of jargon that refers to the quite commonsense statement that networked products and services tend to have more value when more people use them. The most common example is the telephone: During its early days when few people had access to telephones their utility, and therefore their value, were minimal. Today practically everyone has a phone, so their utility and value is so high as to be unquestionable. In this way the value of Bitcoin is directly tied to the number of its users and the frequency of their use.<\/p>\n

Of course Bitcoin\u2019s value stemming from the network effect is not without its own unique difficulties. When the network is still relatively small, each new group\u2019s entry or egress can create massive price fluctuations, resulting in huge profits for early adopters. Unfortunately, this makes Bitcoin look, on the surface, too good to be true\u2014a bit like a Ponzi or pyramid scheme.<\/p>\n

Ponzis and pyramids are distinct and different forms of fraud, but they share one thing in common: The first ones in make a lot of money while the last ones in foot the bill. Both feature initial \u201cinvestors\u201d being paid out directly from new investors\u2019 money. The return is always too good to be true and the gains (for those who actually get gains) are exponential.<\/p>\n

Because Bitcoin\u2019s value has risen so dramatically since its 2011 debut, it seems to fit this sort of a profile at first glance, but then so does every new technology. It\u2019s just not normally the case that we get to invest in this sort of technology and profit as it\u2019s adopted. Imagine being able to invest in the concept of email back in 1965 when some clever hacker at MIT found a way to use primitive multi-user computer systems to pass messages. It might have seemed like a silly waste then, but owning even a tiny percentage of the rights to email today would make one wealthy beyond imagining.<\/p>\n

Technologies follow a known adoption curve, which tends to include a period of exponential rise. Bitcoin is no exception. Ponzis and pyramids both create value for their oldest investors by stealing from the new. There\u2019s no economics involved\u2014just theft.<\/p>\n

Bitcoin creates value for the old investors and<\/em> the new by splitting a finite currency supply more ways. That\u2019s not trickery or theft, just good-old-fashioned supply and demand at work\u2014 a basic and ancient economic principle applied to the world\u2019s newest currency system.<\/p>\n

Originally published in yBitcoin Magazine.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

We all have what feels like an intrinsic understanding of value, though it is actually learned as we come to know our world. A gold bar has value, an empty soda can, not so much. When we encounter new things it\u2019s usually fairly easy to assess what kind of value they might hold, but Bitcoin […]<\/p>\n","protected":false},"author":3637,"featured_media":27747,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[33],"tags":[1938],"class_list":{"0":"post-27748","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-culture","8":"tag-value-of-bitcoin"},"author_data":{"id":3637,"name":"David Perry","nicename":"david-perry","avatar_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/12\/david-perry-promo-image-96x96.png"},"featured_image_url":"https:\/\/bitcoinmagazine.com\/wp-content\/uploads\/2024\/11\/why-bitcoin-has-value.jpg","_links":{"self":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/27748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/users\/3637"}],"replies":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/comments?post=27748"}],"version-history":[{"count":0,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/posts\/27748\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media\/27747"}],"wp:attachment":[{"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/media?parent=27748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/categories?post=27748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/bitcoinmagazine.com\/wp-json\/wp\/v2\/tags?post=27748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}